Posted on 25/10/2018
A report from the Centre for Policy Studies (CPS), suggests ‘Five Proposals to Simplify Saving’.
Michael Johnson has been calling for a radical realignment of savings incentives since his paper in November 2012, ‘Why Pension Tax Reliefs Should be Reformed’, and the scrapping of tax relief since the CPS statement of April 2014.
In the 2014 CPS statement, Johnson suggested getting rid of the current tax relief framework, replacing it with a Treasury contribution of 50p per £1 saved, up to an annual allowance and paid irrespective of the saver’s taxpaying status. He also suggested scrapping the 25% tax-free lump sum. Neither proposal was taken on board.
More than four years later, we are still seeing proposals for the scrapping of pensions tax relief. There is no denying that some of the key points made, as part of the latest CPS report, are fundamental issues that need to be discussed and addressed.
Tax relief has been and will be an increasing cost to the Treasury; the incentives behind tax relief do favour the higher paid and current pensions are complex. However, I am not convinced that the move from exempt-exempt-taxed (EET) to taxed-exempt-exempt (TEE) will present a more understandable proposition in the short term.
If we do see a move from EET to TEE there will be a significant period of overlap with the run off of current EET pensions, which if they continue under current legislation, will have radically different tax treatment on retirement and benefit payments on death when compared to a TEE vehicle.
The resulting advice requirements on deccumulation would in my view be more necessary than ever. Consideration as to how the proposed system would impact on current defined benefit (DB) schemes also seems not to have been addressed in the report.
If the proposals are to be considered and adopted, they will need to be phased in and released in conjunction with an overhaul of the ISA system. This period to a “demarcation” date should be sufficiently in advance to allow comprehensive education of the adviser and consumer market and not rushed through as was the case with pension freedoms, for example.
There are currently multiple ISA offerings, and adding another could become equally as baffling as the multiple pension options.
The Lifetime ISA is the most recent of these and is neither a savings vehicle for a first home nor a retirement savings vehicle. If it is to remain, it should refocus on one particular purpose rather than the two disparate ones it currently serves.
It is clear that more needs to be done to simplify people’s understanding of pensions and the benefits they can offer in retirement but adding more products to the long list already available is not the way go about this.
Educating people on why they should be saving towards their retirement and the benefits of using a pension vehicle should be the main focus because without that basic understanding and acceptance of how valuable a person’s pension will be, any new proposal is likely to fail.
The provision of pension tax relief has been a long-debated topic and one I am sure the Treasury are open to removing. However, this is just another reason for people to believe that the pensions they are investing into today may not be the same when it comes to their retirement.